How to handle an escrow shortage

In this article:

• Why escrow shortages happen
• What your options are if you have an escrow shortage
• How to prevent escrow shortage surprises next year

Many homeowners first hear the term "escrow shortage" when they open their annual escrow statement. It can feel confusing — and understandably so. Even if you've made every mortgage payment on time, your escrow account may still come up short. The good news is that shortages are common, manageable and usually tied to normal changes in taxes or insurance.

At Desert Financial, our goal is to help you understand why escrow shortages occur and what steps you can take to handle them with confidence. This guide breaks down the causes, your repayment options and how to reduce the likelihood of shortages in the future.

What is an escrow shortage?

An escrow shortage happens when your escrow account does not have enough funds to pay your projected expenses for the upcoming year. Because your escrow account is used to pay your property taxes and homeowners insurance, any increase in these costs can reduce your cushion and create a shortage.

Your escrow account is intended to maintain a safe balance that follows federal guidelines. When that balance falls short, your mortgage payment may need to be adjusted.

How do escrow shortages happen?

Even if you've paid on time every month, your escrow balance can still change for several reasons:

1. Property taxes increased

Counties often adjust tax amounts based on:

• • Rising home values
  • New developments or infrastructure
  • School district changes
  • Budget updates or voter-approved measures

If your tax bill goes up — even moderately — your escrow account must be recalculated. Example: If your yearly taxes rise by $480, your monthly escrow payment will increase by $40.

2. Homeowners insurance premiums went up

Insurance companies may raise premiums due to:

• • Inflation or rebuilding costs
  • Material and labor shortages
  • Updated risk assessments
  • Claims filed in your area

Because your insurance premium is paid from escrow, any increase directly affects your account balance.

3. You switched insurance providers

This is one of the most common — and most overlooked — reasons for shortages. When you change insurers:

• • You receive a refund from your old policy.
  • You start a new policy with a potentially different premium.
  • Your escrow account may end up lower than expected.

If the refund isn't deposited back into your escrow account, a shortage may occur.

4. Escrow was underfunded in the prior year

Your previous escrow estimate may not have anticipated a higher tax or insurance cost. This happens industry-wide and is not unique to Desert Financial. A higher-than-expected bill can create:

• • An immediate shortage
  • A deficiency (negative balance)
  • An increase in next year's monthly escrow contributions

Understanding the difference between a shortage and a deficiency

The terms escrow shortage and escrow deficiency are often confused but mean very different things: An escrow shortage means your escrow balance is lower than what's needed for future expenses. An escrow deficiency means your escrow balance already went negative during the year because a tax or insurance bill was higher than expected.

Both situations are manageable and are addressed during your annual escrow analysis.

How escrow shortages are calculated

Your annual escrow analysis looks at:

• What was paid last year
• What is expected this year
• What's currently in your escrow account
• The required "cushion" per federal guidelines

If projected expenses exceed the current balance (plus the required cushion), you'll see a shortage amount listed on your statement. The shortage reflects the difference between what should be in the account versus what's actually there.

Your options for handling an escrow shortage

Desert Financial provides flexible options so you can choose what fits your budget.

Option 1: Pay the shortage in full: This is the simplest option if your budget allows and helps stabilize your escrow account quickly. The benefits are:

• Your monthly payment will increase less.
• Your escrow account is fully restored.
• Helps prevent future escalation of payment changes

Option 2: Spread the shortage over 12 months: If you prefer to keep your out-of-pocket cost lower upfront, you can spread the shortage over the next year. Example: If your shortage is $600, your payment would increase by $50 per month for 12 months in addition to any adjustments for next year's taxes and insurance.

This is the most common option for many homeowners. The benefits of this are that you don't have a large upfront payment and the cost is distributed predictably throughout the year.

Option 3: Make a partial shortage payment: In some cases, members may choose to pay part of the shortage and spread the rest. This hybrid option helps reduce the monthly increase and avoid the burden of paying the entire shortage at once.

If you're unsure which approach is best, we're here to walk through the numbers with you.

How paying a shortage affects your monthly payment

Even if you pay your shortage in full, your monthly payment may still increase due to higher projected taxes or insurance. Paying the shortage simply reduces the additional amount added to your payment. Your escrow analysis statement will clearly show:

• Old monthly payment
• New monthly payment
• Shortage amount
• How the shortage impacts your payment under each option

Tips to prevent or reduce future escrow shortages

Being proactive can make a significant difference in your future escrow balance. While shortages can't always be avoided, you can take proactive steps to reduce surprises:

• Review your annual tax assessment: Counties often send notices ahead of changes.
• Monitor your insurance premium: Contact your insurer before renewal for potential savings.
• Deposit refund checks from old insurance policies into your escrow account: This helps maintain balance stability.
• Avoid major mid-year policy changes unless necessary: It's often best to time insurance transitions around your renewal date.
• Budget for moderate annual increases: Most homeowners experience at least minor adjustments year to year.

When to contact Desert Financial

We're always here to support you with clear answers and member-first service. Contact Mortgage Servicing at (602) 433-7097 or firstmortgageservicing@desertfinancial.com if:

• Your shortage amount seems unusually high.
• You changed insurance recently.
• You're unsure whether paying in full or spreading payments is best.
• You're concerned about affording the new payment.
• Something on your escrow statement doesn't look right.